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Speed limits and traffic deaths June 9, 2008

Posted by Jeff in Economics, Politics.
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With the price of gas rising, there is increased murmuring about legislating a lower speed limit in order to conserve fuel.  I remarked to family this weekend that that seems to be an odd thing to attempt to legislate.  Here’s why:

In 1974, the federal government legislated a national speed limit of 55 miles per hour in response to the fuel crisis of 1973.  The rationale at the time was that fuel prices were high, oil was running out, and our only option was to start conserving what was left.  After the fuel crisis passed, the federal speed limit was kept in place because of safety reasons:  in the first few months of the federally mandated speed limit, traffic deaths actually dropped.  There are two problems with this public policy: the first is economic and the second is ability to deliver on promised results.

The first problem with the federally limited speed is that it is not an economically sound policy.  For example, while it was true that fuel prices were high and it was true that oil was running out, it was not true that oil was running out soon.  Fossil fuels are, and should be treated as, finite resources.  That said, there is so much oil available, that we Earthlings will not use up our supply for decades, if not centuries.  A more economically sound way of expressing the problem is that there’s only so much oil available at a certain price.  If oil costs $20/barrel, there will be less supply than if oil costs $200/barrel, because a the cheaper price restricts the amount of cost that can go into retrieving the oil.  If oil were to reach $200/barrel, it would become feasible to extract oil from places that are not financially feasible to extract from at $20/barrel.  Therefore, legislating a lower speed limit for the purposes of conserving a resource for which plenty of supply exists is bad public policy.  In fact, it turned out that the conservation initiative only resulted in saving about 1% of the oil that otherwise would have been consumed.  (Source:  http://www.heritage.org/Research/SmartGrowth/bg532.cfm)

The second problem with the federal speed limit is that its supposed benefits did not stand the test of time.  The drop in traffic deaths that was reported in the year following the mandated lower speed had actually vanished by 1978 and was really no more than a short term anomaly.  (Source:  http://www.cato.org/pub_display.php?pub_id=1205)  Consider also that when the federal mandate was removed in 1995, the number of traffic deaths per mile travelled began to decline – as of 2006, the most recent year for which I can find data, the NHTSA reports that the number of traffic fatalities per vehicle mile travelled has decreased by 18.5% over their level in 1994, the year before the federally-mandated speed was lifted.  (Source:  http://www-fars.nhtsa.dot.gov/Main/index.aspx)

An interesting question that arises is “How many more deaths could be prevented if we raised speed limits even higher?”  In fact, what if we took the extreme position of having no speed limits altogether?  It turns out that we actually have data that proves that removing the speed limit altogether actually reduces traffic deaths.  When the federal speed limit was lifted in 1995, the state of Montana had effectively no speed limit, a regulation that was ultimately struck down for its “vagueness”.  Nevertheless, before it was struck down, Montana saw its traffic fatalities fall to record low levels.  When the statute was struck down and Montana reinstated numerical speed limits, the fatality rate immediately began to climb.  Similar data exists for the comparison between the German autobahn, where there is no speed limit, and American interstate highways, where there is.  (Source:  http://www.motorists.org/pressreleases/home/montana-no-speed-limit-safety-paradox/)

Legislating lower speed limits as a method of conserving fuel is public policy that endangers the public while not meaningfully reducing fuel consumption.  In order to reduce traffic fatalities, neither the federal government nor state and local governments should impose a maximum limit on highway speeds. 

The price of cheap gas June 3, 2008

Posted by Jeff in Economics.
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Motorists lined up for $1.05/gallon gas in DallasDallas radio station KRNB recently sold gas for $1.05 per gallon as a part of a promotional event at an Exxon station.  The promotion was quite popular – the nearby image shows cars packed into the parking lot of the gas station and even lined up along the street nearby to buy fuel for $2.80/gallon less than the average price in Dallas that day – $3.85/gallon. 



This promotional event is a good lesson in how prices work in the (free) market.  Here’s how it works:  For a lot of reasons which include the increased global demand for oil, the war in Iraq, the whims of OPEC members, the value of the dollar, and the limitations imposed on building new refining capacity or acquiring oil from new sources, the price of oil is at an all-time high.  This means that – government subsidies and taxes notwithstanding – the price most people pay for a gallon of gas is also at an all-time high.  The price of a gallon of gas is determined by the market and in Dallas on this particular day, that price was $3.85/gallon.

Question:  of all the gas stations in the DFW metroplex that are roughly the same size and located in similarly trafficked neighborhoods as the one pictured above, which one probably sold the largest number of gallons of gas on the day of the promotion?  The answer, of course, is the one where the price was artificially reduced to $1.05/gallon.  However, selling the largest number of gallons does not mean that this station also had the largest profit.  In fact, it’s almost certain that this station had the biggest net *loss* on gasoline for the day (the subsidy from the radio station notwithstanding, of course).  So in this case, the station that moved the most product also lost the most money.  This is because the price of a gallon of gas was $3.85, not $1.05.

On the day of the promotion, the market was willing to pay $3.85/gallon for a certain number of gallons of gas.  That same market was willing to buy many, many more gallons of gas, if it only had to pay $1.05.  It doesn’t matter how that price was artificially reduced, it just matters that an external force caused it to be reduced.  If KRNB had not reduced the price to $1.05 by paying a subsidy to the gas station but the government had imposed a “price cap” of $1.05 for that same station, the outcome would’ve been the same:  cars would be lined up all afternoon to buy as much gas as possible for this impossibly low price.

Of course, in the latter scenario (the government-imposed price cap), the gas station would not have been able to make a profit, so they would have simply opted not to sell gas.  This means that some of the supply of gas would have been taken off the market and that the people that wanted to buy gas at the market-determined price of $3.85/gallon would have had to buy it from another station.   What may escape the notice of some is that the imposition of the price cap would have actually *increased* the price of gas.  This is because the demand from people that needed gas would have stayed the same, but the supply would have been restricted, so the stations that were still selling gas would have had to charge a higher price.

What if the government imposed a price cap on all stations, though, instead of just on one?  The lower the price, the more stations would choose not to sell gas.  Sure, some might be willing to break-even (or even take a small loss) on gas in order to drive sales of in-store items like sodas and candy, but many would not be able to pay their employees and rent if they lost too much money on gas.  With the price cap removing the stations’ ability to make a profit on gas sales, the stations would simply opt not to sell gas, so that they’d not impact the profits they were making on other items.  Every time another station decided to take their supply of gas off the market, the market-driven price of gas at other stations would go up. 

It is an economic certainty that artificially controlled prices yield negative unintended consequences, not the least of which is higher prices.  The way to fix the problem is not through price controls, but rather through increasing supply (such as drilling for new sources of oil or increasing refining capacity), reducing demand (such as bringing quality, low-cost, fuel efficient vehicles to market), and/or adjusting an independent variable (such as the value of the dollar) that makes the price you pay at the pump seem less expensive because your purchasing power is greater.